The improvement may also have been supported by APRA’s changes to the interest rate floor for loan serviceability, particularly in the owner-occupier segment. The banks announced new floor rates around 1.5-2% lower than the previous guidance of a 7% floor, with a minimum 2.5% buffer. Easing the interest rate floor has increased maximum loan sizes available to low-risk buyers. However, the impact on credit growth has not been significant as most borrowers don’t take out the maximum loan available to them.
Interest rate cuts have been a key factor in lifting auction clearance rates and stabilising house prices, which in the past three months rose 2.2% on a national level, with gains of 3.5% and 3.4% in Sydney and Melbourne. Although house prices are still lower than 2016 levels, a “V” shaped recovery remains unlikely. Right now, the volume of new homes for sales remains relatively low. But, as we move to the end of the year, supply is likely to lift, capping further price rises. As a result, a modest lift in prices over 2020 is the most likely trajectory.
A rapid housing price recovery will also be dampened by the declining confidence of off-plan apartment buyers in Sydney and, to a lesser extent, Melbourne. In 2019, the value of off-plan apartments in Sydney and Melbourne declined by 15% and 11%, respectively.
The decline in personal credit lending has also accelerated. System growth fell 4.4% over the year to September 2019, compared to a fall of 1.4% over the previous 12 months. According to APRA data, personal credit card balances fell 5.5% (6% for the major banks) over the six months to September 2019. This may partly reflect disruption in the consumer loans market, as buy-now-pay-later services grow in popularity, prompting one smaller bank to halt plans for a strategic push into credit cards. It may also indicate that consumers are using tax refunds and mortgage savings from interest rate cuts to pay down household debt.
Further disruption is likely with the rollout of open banking, which will empower consumers to switch financial institutions more easily and find deals that better meet their needs.
For the major banks, aggregate business lending increased, although results varied across individual banks. Across the wider banking sector, lending to large corporates grew around 5% over the year and continues to drive business credit growth, while lending to small businesses remained relatively flat. Small business lending growth has been affected by:
- Tighter lending standards – with banks treating the division between personal and small business finances with more caution.
- Housing price declines reducing the amount small businesses can borrow – as loans are often secured against residential property.